China moves to bolster economic recovery with RRR cut

China has announced its first cut in the amount of cash that banks must hold as reserves this year to bolster the economic growth momentum after investment stabilized and consumption rebounded in the first two months.

The People's Bank of China, the central bank, said Friday it would cut the reserve requirement ratio (RRR) by 0.25 percentage points for financial institutions from March 27 to keep liquidity reasonably ample and serve the real economy.

After the reduction, the weighted average RRR for lenders, except those already implementing a 5-percent ratio, will drop to around 7.6 percent.

The central bank said the move aims to serve the real economy and keep liquidity reasonably ample in the banking system.

With 268.2 trillion yuan (about 39 trillion U.S. dollars) of deposits in Chinese banks at the end of February, the cut will unleash around 600 billion yuan of medium and long-term liquidity, Bruce Pang, the Greater China chief economist of real estate and investment management services firm JLL, said.

With more cash reserves unlocked, banks will be able to enhance their ability to expand credit, analysts said.

As some lenders face tightening liquidity after strong credit expansion in the first two months, the stable long-term funds provided by the RRR cut will ease banks' liquidity pressures and allow them to more actively support weak areas of the real economy and major emerging industries, said Zhou Maohua, an analyst with the China Everbright Bank.

New yuan loans hit a monthly record in January at 4.9 trillion yuan. It retreated to a lower but still vibrant 1.81 trillion yuan in February, up 592.8 billion yuan from the same period last year.

China has adopted several policy tools to strengthen financial support for the economy. In 2022, the central bank lowered the RRR twice to bring more than 1 trillion yuan of liquidity and also cut the prime loan rate, a market-based benchmark lending rate, three times.

The latest RRR cut would lend significant support to sustaining the economic recovery that has become increasingly palpable since the beginning of the year.

The country's retail sales reversed a three-month losing streak in January and February combined, and its industrial output also picked up pace from December. Other economic indicators, including fixed-asset investment and the services production index, also posted year-on-year growth.

The capital demand has increased markedly due to a warming economy, and will grow much bigger in the second quarter and beyond in consumption, real estate, technology and innovation, and infrastructure construction, said Wang Yunjin, a researcher with the Zhixin Investment Research Institute.

Wang believes that with the liquidity injection, banks will be better prepared for the next phase of demand expansion.

Moreover, as recent U.S. and European banking turmoil exposed the global financial fragility, analysts believe the RRR cut sent a positive signal of China's stable financial market and built up confidence in the world's second-largest economy.

China aims to achieve faster growth of around 5 percent with better development quality in 2023, according to this year's government work report. The country's gross domestic product registered a 3-percent increase last year.